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Tackling money-laundering and terrorism with technology

A. AsohanApr 21, 2014

Financial institutes using tech to not just assess risk, but to cut off funding to terrorists

Malaysia very plugged into international anti-money laundering regulations and practices

IF you were a journalist during the early days when the Internet went public, the name LexisNexis would have been seared into your memory. Its ‘Nexis’ database of news articles was a great resource for the profession.

The Dayton, Ohio-headquartered company started life providing computer-assisted legal and business research, and was a pioneer in making such documents accessible via electronics means, even before the Internet. The Internet came and has moved on, and so has the LexisNexis Group.

Amongst other solutions, it is now aiming its risk management practice at helping financial institutes use technology to tackle money-laundering and cut off funding to terrorist organisations, fuelled in no small part by its track record in collecting and collating data .

“For every financial crime, the question is what happens to the funds that have been stolen. Normally, they get spent or re-invested somewhere,” says Chrisol Correia (pic), general manager, AML International, at LexisNexis.

“The issue for banks is not only how to stop that abuse in the first place, but also how to stop that money from flowing back into the financial system – in essence, how to stop the money from being laundered,” he says, speaking to Digital News Asia (DNA) in Kuala Lumpur recently.

For instance, its FraudPoint solution provides investigative tools, risk prediction and authentication; while its industry experts in fraud analytics can help banks transform data into actionable scoring intelligence with substantially fewer false positives, the company claims.

Much of today’s focus on anti-money laundering (AML) and fighting terrorism came after the September 11, 2001 terrorist attacks in the United States. The ‘9/11’ attacks saw the International Monetary Fund (IMF) intensifying its AML activities and extending them to include combating the financing of terrorism (CFT).

“Money laundering is a process by which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity,” the IMF says.

“Terrorist financing involves the raising and processing of assets to supply terrorists with resources to pursue their activities. While these two phenomena differ in many ways, they often exploit the same vulnerabilities in financial systems that allow for an inappropriate level of anonymity and non-transparency in the execution of financial transactions,” it adds.

Thanks to efforts like this, “there’s an evolving security apparatus that’s regulated, and it aims to lock these people out of the financial system, for the benefit for everyone,” says Correia.

Banks and financial institutes have relationships with national and international enforcement agencies. “What LexisNexis does is aggregate the data from these agencies – we have over 900 sanctioned and police wanted lists from around the world, and they’re all sort of brought together into one place, normalised and maintained on a daily basis,” says Correia.

“Our customers take that information and implement it into their client-onboarding and client-screening tools so that every day, they can verify that their customers are not connected to, or appear on, those sorts of lists.

“These lists are just one kind of dataset. There are also lists of politically-exposed persons (PEPs) for example, media coverage of corruption, [and others].

“So if someone somewhere in the world is connected to a story about fraud, terrorism or money-laundering, then our analysts will pick it up and provide that information in a structured way to give banks actual intelligence and technology so that they can do something about it.

“Our screening solutions process about 37 billion names – that gives you a sense of the magnitude. But this is all legal, done with sensitivity to data privacy laws,” he adds.

But how do these people get into the financial systems in the first place?

“What do they do with the money? That’s the question. They want to put it back in the financial system, or buy goods and assets with it.

“What banks need to do from a financial and regulatory perspective is to detect that abuse, and stop it,” he adds.

In financial regulation, a ‘politically exposed person’ or PEP describes someone who has been entrusted with a prominent public function, or an individual who is closely related to such a person. PEPs generally present a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold, according to the IMF.

Malaysia moving fast

Despite the general cynicism about the Malaysian Government’s anti-corruption efforts, Malaysia follows international standards when it comes to AML and terrorist financing regulations.

“Malaysia has been evolving quickly in its regulatory framework to protect its citizens against the threats of money-laundering, corruption, etc.,” says Correia.

“This needs the cooperation of the financial sector, so those institutions have been deploying new technologies to protect, assess and monitor risk in financial transactions and monetary instruments.

“So for example, every time you buy something online, it is likely that that transaction will be screened (by the bank) against a number of risk lists – it’s not just questions of identity theft and fraud, but also the abuse of the financial system by criminals and terrorists,” he adds.

The central bank and industry regulator Bank Negara Malaysia Bank recently issued revised policies on AML/CFT, which introduced an obligation for reporting institutions to adopt a risk-based approach in identifying, assessing, and understanding their money laundering and terrorism financing risks.

“Generally, the Malaysian financial community is very plugged in to the international community, so there’s a real appreciation of the issues and there is a very serious intent to implement best practices,” says Correia.

“It’s good for business, frankly,” he says, adding that there’s been a cultural shift, and risk-management and compliance are no longer seen as a cost or a piece of bureaucracy within a bank.

“In the old days, about 12 years ago, the joke was that the compliance department was the ‘business prevention unit.’

“That culture has really changed now, and there is awareness that for the good of the financial institution, and for society as a whole, the role of compliance shouldn’t be about a small team or an individual, but that everyone has a responsibility to make sure that rules are enforced and that policies are observed correctly,” he says.

Indeed, the whole practice is increasingly being seen as a ‘business enabler.’

“I think it’s seen not only as a necessary response to regulation, but also as a means to better know your customers, so that you understand the risks better,” says Correia.

“Once you understand the risks, you can better work out what products to sell. Understanding your customers better and knowing what risks to take lead to better business decisions.

“The whole area of compliance now, along with risk management, has a sort of different role it used to have – it is no longer so narrow and is more holistic; it’s about understanding the nature of the relationship [banks have with their customers],” he adds.